Incorporate in Delaware

Forming your business in Delaware

Differences Between Delaware C Corporations and S Corporations

When you form a Delaware corporation, you’ll need to decide between forming a C Corporation and an S Corporation. If you already know which you’d like to form, you can start organizing your incorporation information now in our no-obligation incorporation system, saving your information until you’re ready to order.

Put in simple terms, a Delaware C Corporation is the basic type of corporation. A Delaware S Corporation is a basic corporation (C Corporation) that, with the assent of all of its shareholders, elects to have special tax status by filing a Form 2553 with the IRS. There are a few restrictions that apply to S Corporations but the tax treatment is the primary difference between a Delaware C Corporation and a Delaware S Corporation.

Delaware C Corporations face “Double Taxation”

Delaware C Corporations and their shareholders face what is called “double taxation”. The corporation itself files income tax returns and pays income taxes while its shareholders do not report any of the business income and expenses on their personal income tax returns. Shareholders do report and pay income taxes on what they are paid by the corporation.

A Delaware C Corporation can accumulate capital easier than an S Corporation since a corporation’s tax rate is generally lower than that of individuals. But since Delaware C Corporation shareholders must pay taxes on any dividends they may receive even though the corporation has already paid income taxes, so called “double taxation” results.

“Pass-Through” Taxation of Delaware S Corporations

“Pass-through” taxation the main reason most small business owners choose to form Delaware S Corporations.

After successfully filing the I.R.S. Form 2553 with the Internal Revenue Service, a Delaware S Corporation is not subject to income taxes. Those with more than one shareholder file an informational K-1 tax return. Income is “passed through” to the shareholders (as determined on the last day of the corporation’s tax year) who then include in their income their pro rata share of the amount they would have received in dividends if the corporation had distributed 100% of its taxable income for the year to its shareholders.

You should be aware that this often produces what’s called "Phantom Income", something that unfortunately comes as a shock to many S Corporation shareholders the first time they are faced with reporting and paying taxes on income they did not actually receive. Of course this problem can be avoided by having the corporation distribute enough of its income to cover its shareholders’ tax liability. Losses are likewise passed through to the S Corporation’s shareholders who can use any such losses to offset income they may have received from other sources. This is a great advantage in the early stages of a business when losses are common.

Other Differences Between Delaware C Corporations and S Corporations

Other differences are primarily the result of restrictions that are placed on S Corporations, some of which include the following:

• S Corporations can have no more than 100 shareholders
• S Corporations can have only one class of stock (voting rights can differ)
• Other corporations, Limited Liability Companies (LLC’s), certain kinds of trusts, partnerships, or non-resident aliens cannot own S Corporation stock.
• S Corporations are not allowed to conduct certain kinds of business.
• There are limitations on some fringe benefits for major shareholders.

MaxFilings recommends consulting with an attorney or accountant to help you determine whether a C Corporation or S Corporation will be best for you.

Once you have decided it's time to form your Delaware corporation, MaxFilings can help you do so quickly, easily, and economically. Start entering your information now and save it until you're ready to place your order. You're under no obligation, and there is no charge until you actually place your order.

The following articles provide information that should help you in deciding between a Delaware C corporation, a Delaware S Corporation or a Delaware LLC.

Can S Corporation status reduce self-employment taxes?

Is pass-through tax treatment the same for LLC's & S Corporations?